By Whitney McFerron, Elizabeth
Campbell and Jeff Wilson - Mar 14, 2011 3:56
Milk Seen Plunging 14% as Costliest
Cheese in Quarter Century Curbs Demand
milk rally that sent prices up 48 percent this year,
more than any agricultural commodity, may be ending
as farmers respond with record production and the costliest
cheese in a quarter century curbs demand.
in the U.S., the world’s second-largest producer, may
rise 1.7 percent to 196 billion pounds in 2011, enough
to fill about 34,500 Olympic-sized pools, the Department
of Agriculture estimates. Demand will weaken as restaurants
cut promotions and grocers raise prices, said INTL FCStone
Inc., a New York-based broker. Futures may drop 14 percent
to $16.86 per 100 pounds by Dec. 31, a Bloomberg survey
of 10 analysts showed.
are missing out on profits from milk’s biggest rally
since at least 1996 as the surge in grain that drove
world food prices to a record, contributing to protests
in northern Africa and the Middle East, also boosted
the cost of feeding cows. While income for grain and
cotton growers will rise more than 20 percent this year,
earnings at dairies may drop 13 percent, the government
farmers are having some of the best years they’ve had
in a long time profit-wise, but you couldn’t say that
for dairy,” said Bob Cropp, an economist at the University
of Wisconsin in Madison who has been studying the industry
since 1966. “Dairy facilities are running at the maximum.
With a little softening in demand, prices are going
to come down.”
futures on the Chicago Mercantile Exchange fell 0.2
percent today to $19.61 in Chicago, after reaching a
32-month high of $19.65 on March 11. Prices are up 53
percent from a year earlier as importers from Mexico
to China increased buying and the rebounding U.S. economy
bolstered domestic demand.
2011 rally has exceeded those of all agricultural futures
traded in New York and Chicago including cotton, which
surged 42 percent and reached a record last week. The
Standard & Poor’s GSCI Index of 24 commodities advanced
11 percent, and the S&P 500 Index of stocks rose
3.7 percent. As of March 10, Treasuries gained 0.1 percent
this year, a Bank of America Merrill Lynch index shows.
are already anticipating a drop, with the December contract
at a 16 percent discount to the one that expires this
month. Shawn Hackett, the president of Hackett Financial
Advisers, who correctly projected in October that milk
would surge, now says futures for Class III milk, used
to make cheese, may fall as low as $15 amid higher output
in Australia and New Zealand, the largest exporter.
have erupted from Bahrain to Morocco, in part fueled
by food costs the United Nations says reached a record
last month. Protests already toppled leaders in Egypt
and Tunisia. The projected drop in milk prices will
do little to relieve the surge in food inflation that
the World Bank says helped drive 44 million more people
into extreme poverty since June.
rally may continue for several more months because exports
will support prices, said Jerry Dryer, the Delray Beach,
Florida-based publisher of the Dairy & Food Market
Analyst, who has been following the industry for three
surged 63 percent to $3.7 billion last year, nearing
the 2008 record of $3.8 billion, U.S. Dairy Export Council
data show. Cheese exports rose to an all-time high,
and milk-powder sales climbed 61 percent, the Arlington,
Virginia- based trade group said.
exports rose as New Zealand boosted sales to China,
said James Dunn, an economist at Pennsylvania State
University in University Park. China bought about 353
million kilograms (778 million pounds) last year, compared
with 69 million kilograms in 2008, according to New
Zealand government data.
last advance of this magnitude ran for 15 months through
June 2007, when it more than doubled to a record $22.45.
Prices would have to advance 14 percent more to match
rally will last at least a full year before rising production
catches up with demand,” said Dryer of Dairy & Food
may not support the gains much longer, said Mary Ledman,
a former economist with Kraft Foods Inc. U.S. milk production
this year may begin rising in April and May, just as
retailers start increasing prices to shoppers, she said.
Inc. (SWY), the fourth-largest U.S. supermarket chain
by sales, said Feb. 24 that it began to pass higher
costs to consumers during the fourth quarter, including
margins in the dairy case, and particularly on fluid
milk, have been squeezed since 2010,” said Ledman, who
owns the Libertyville, Illinois-based consultant Keough
Ledman Associates. “I don’t think they have any choice
but to raise retail-milk prices in 2011.”
Ice Cream, which has 11 stores in Illinois and Iowa
and sells to about 100 retail outlets including Wal-Mart
Stores Inc., may boost prices in coming months because
costs for milk, cream and sugar have jumped about 50
percent from a year ago, said Jeff Tunberg, who owns
the Moline, Illinois-based business with his brother.
cream has been recession-resistant, but not recession-proof,”
Tunberg said. “We’ve been in business for 78 years,
and we’ve always had a model that we will raise our
price before we will change our quality.”
cheese in supermarkets averaged $5.143 a pound in January,
the highest since at least 1984, while a half gallon
of ice cream sold for $4.74, the most since 1980, according
to data collected from about 26,000 retailers by the
Bureau of Labor Statistics. Retail whole milk averaged
$3.301 a gallon, 2 percent more than a year earlier.
food inflation accelerated 0.9 percent in January, the
fastest monthly pace since June 2008, when prices were
headed for their biggest annual gain in 28 years. Costs
will rise as much as 4 percent this year, more than
the 2 percent to 3 percent estimated in January, the
USDA said last month.
prices don’t mean improved earnings for dairy farmers
because corn, the main feed ingredient, is 82 percent
costlier than a year ago. In California, the biggest
milk producer, feed costs made up about 84 percent of
the price farmers received for milk in December, according
to USDA data.
average net-cash income, or earnings used to pay most
expenses and debt, for American dairies will decline
to $184,000 this year from $212,100 in 2010, a bigger
drop than for producers of beef cattle, hogs and poultry,
the USDA estimates.
milk prices still allowed dairies to earn $1.18 per
100 pounds of milk at the end of February, compared
with 21 cents at the same time last year, said Chip
Whalen, a senior risk manager at Commodity & Ingredient
Hedging LLC in Chicago.
herd will rise 0.4 percent to 9.154 million cows on
average this year, the first annual increase since 2008,
the USDA estimates.
produced on average 21,149 pounds (9.59 metric tons)
last year, more than double the amount in 1970, according
to the USDA. Changes to breeding methods mean more females
are being born. Farmers also maintain younger herds
by slaughtering older cows when their milk output slows.
probably will increase in the next few months to a seasonal
peak that will exceed the monthly record of 1,893 pounds
reached in May, said Joel Karlin, the commodity sales
coordinator for Western Milling in Goshen, California,
which makes feed for dairy farms.
the same time, higher prices will curb demand from consumers,
erasing profit for producers that don’t grow their own
feed or hedge their grain costs, said Robert Chesler,
a Chicago-based vice president of food service for INTL
buying has been led by promotions and specials, two-for-$10-pizza
deals, things like that,” Chesler said. “That’s going
to be a difficult thing to continue in 2011, because
of the price increases in commodities, so demand domestically
could certainly take a little bit of a pullback.”
Dairy Inc., a processor based in North Aurora, Illinois,
that buys milk from farmers, increased the retail price
of half-gallon, glass-bottle milk products by almost
7 percent as of March 1, Chief Executive Officer Joe
Oberweis said. The 84-year-old company’s milk cost has
doubled since 2009, he said.
are “a little bit more optimistic at this point, but,
still, nobody’s jumping up in the air and kicking their
heels,” said Joyce Bupp, a 65-year-old farmer who owns
a 170- cow dairy in Seven Valleys, Pennsylvania.
milk production may continue to rise, said Michael Swanson,
a Minneapolis-based economist at Wells Fargo & Co.,
the largest U.S. agricultural lender. Producers “expand
when prices are good and expand when prices are bad,”